April 11, 2007

I promised to many of my students and friends that I would create a webpage on “investing in Chinese A share market”. I finally found some time to do it.

History of my portfolio

The whole story started in summer 2005 when I was back from Paris to teach MBA/EMBA financial statement analysis classes in CEIBS. At that time, the Chinese equity market was in its worst period by approaching to the emblematic 1000 points predicted by my colleague Prof. XU Xiaonian. In order to create some new cases for my lecture, I started to check the accounts of Chinese listed companies. Surprisingly, contrary to many well-spread opinions at that time, many of them were very solvent and profitable and more importantly, their share prices were very low.

And then, my teaching assistant Ms. Helen Wang gave me a very good hint: “Professor, you mentioned many interesting techniques on how to look through the financial statements, how to detect accounting manipulations. Why don’t you put your theory into practices? You may select a portfolio of Chinese companies by using your criteria and see if you can beat the market with your portfolio.” Following her suggestion, I started to work this project but it was in arrest after I went back to Paris because of inaccessibility to accounting and financial data in WindNet.

One year later, I decided to move to CEIBS on permanent basis and again in summer, with the help of my research assistant Ms. Yvonne Yuan, I finally prepared my portfolio on August 15, 2007 based on seven criteria.

Comments on my portfolio
With a simple glimpse, we may see that most of selected firms come from quite “boring” industries, like steel, metals, coal mining, ports, and highways. There are few hi-tech companies and no banks (not because these firms are no good but too pricey. This may be one of the limitations of this portfolio.
Some students and colleagues suggest that I may change slightly the criterion No. 7: instead of using a restricted P/E of 20, I may use an industry-adjusted P/E. The advantage of this approach is to get a more industry-balanced portfolio. However, the industry-based P/E adjustment is highly subjective, which will break the original philosophy for constructing this portfolio. Besides, in be honest, I am quite happy with this over-representation from basic industries. If we believe in the bullish development of Chinese economy, the growth perspectives of these industries are very brighter and less volatile than other “fancy” sectors.

Updates of my portfolio

Update on Jan. 15, 2007 with the data of Quarter 3 2006.
Nine companies are taken out:

22 companies are added:

Update on Mar. 14, 2007
Four companies are added: